'Red Envelopes' for China's Home Buyers

During the Spring Festival, it is customary for children in China to receive a red envelope enclosed with cash from their elders. This year, many have made the wry remark that the central government had done just that – for some home owners and buyers.

The property tax on residential housing was touted by the government as a means to cool the property market. It came into force in Chongqing and Shanghai on January 28, nearly a week before the Chinese New Year. The first-ever tax levied on homes in decades now invites more questions than answers: Why Chongqing and Shanghai? Will the tax help rein in runaway real estate prices? What will the government do with property tax revenues?

The debate over the tax was heated throughout 2010. The opinions were clearly divided among lines of income: university students and low-income people welcomed it while middle-class people were against it. The central government was unsure of the repercussions of the tax, saying that it would approach the nation-wide implementation of the tax with caution. Chongqing, with former Minister of Trade Bo Xilai as the municipal party secretary, has been practicing populist policies, sometimes reminiscent of the Chairman Mao Era. The southwestern city first mulled property taxes in March 2010 and repeatedly urged the State Council, China's cabinet, to approve it. Among market observers, there are diverging theories over Shanghai's inclusion in the pilot program. One that has emerged as most plausible is that the Shanghai government wants to shore up revenue streams once land sale proceeds dry up.